Today I’ll continue talking about the doctrine of immunity from federal antitrust law for “state action”, in the context of the Fourth Circuit’s North Carolina Board of Dental Examiners v. FTC opinion. (See Monday’s post for an introduction to this doctrine, and see Tuesday’s post for the facts of the dental examiners case.) On Wednesday I discussed the three different approaches taken by various circuit courts to this issue. Some circuits take a cursory approach and either find a board’s actions to be “state action” with no analysis or give dispositive weight to an entity’s labeling as a state agency. Other circuits look to a laundry list of factors to determine whether a board has more public or private characteristics. The Fourth Circuit’s approach here is more categorical: if a board regulating an industry is peopled by participants in that industry, and if they’re elected by other industry participants, then it’s “private” for antitrust purposes, and therefore can’t get immunity from antitrust law unless it’s (1) operating under a clearly articulated statutory standard and (2) actively supervised by the state. The FTC would be stricter still and would find a board to be private merely because it’s composed of industry participants.

But who’s right? Today, I’ll explain why I lean toward the Fourth Circuit’s approach, and discuss the arguments against the Fourth Circuit’s approach from the cert petition. (I won’t focus on claims that the Fourth Circuit’s decision is contrary to Supreme Court precedent such as Parker v. Brown itself: while that’s surely relevant for whether the Supreme Court will want to grant cert, I think the case for cert is already clear from the circuit split I discussed on Wednesday; and if the court decides to hear the case on the merits, it can adopt whatever approach it likes.)

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The Board of Dental Examiners is defined by a North Carolina statute as “the agency of the State for the regulation of the practice of dentistry”. The cert petition summarizes the law (citations omitted):

As a state agency, the Board has traditional governmental powers that private actors typically do not have: It has quasi-legislative power “to enact rules and regulations governing the practice of dentistry,” backed by criminal penalties. It has quasi-executive power to issue licenses for dental practice, and to conduct investigations “into any practices committed in th[e] State that might violate” the laws that it enforces. And it has quasi-judicial power to “issue subpoenas requiring the attendance of persons and the production of papers and records . . . in any hearing, investigation or proceeding.”

Likewise, as a state agency, the Board has traditional governmental duties that private actors typically do not have: It must comply with restrictions concerning ethics, administrative procedures, public records, and open meetings. Its conduct is also subject to scrutiny by all three branches of state government. For example, a legislative committee is charged with conducting oversight “to determine if [the Board is] operating in accordance with statutory requirements.” Executive-branch officials receive annual reports summarizing the Board’s regulatory activities. And judicial review of the Board’s conduct is authorized.

According to the cert petition, the “basic legal rule” is that “an official state entity’s enforcement of a clearly articulated anticompetitive state policy is a sovereign act of State government and thus exempt from federal antitrust law—without regard to the public officials’ independence from private interests, method of selection, or supervision by other state entities.” State-action immunity is based on the federalist notion that “federal regulators have no license to condition a State’s sovereign right to adopt anticompetitive state laws on the manner in which the State exercises its equally sovereign right to choose who shall be the public officials that enforce those laws and how they shall do so.”

The petition also cites other (non-antitrust) cases to make this point: “[F]ederal legislation threatening to trench on the States’ arrangements for conducting their own governments should be treated with great skepticism, and read in a way that preserves a State’s chosen disposition of its own power.” (Nixon v. Missouri Municipal League (2004).) “[A] State defines itself as a sovereign” “[t]hrough the structure of its government[] and the character of those who exercise government authority.” (Gregory v. Ashcroft (1991).) By contrast, the Fourth Circuit’s decision here “strips a state agency’s officers of antitrust immunity where the state legislature chooses to select and supervise them in a manner that renders their regulatory actions less independent from private interests than federal authorities deem preferable.” There are more similar quotes throughout the petition, but I think this gives a fair flavor of the argument.

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Note that states are not generally free to structure how they implement their anticompetitive policies without having to worry about antitrust law. Suppose a state decides to give private parties the right to act anticompetitively (as in FTC v. Ticor Title Insurance Co. (1992)), or gives anticompetitive effect to pricing decisions made by private parties (as was the case in Midcal). This may be clearly stated on the face of the relevant state law, and yet the private anticompetitive conduct, though explicitly contemplated by the state, isn’t automatically entitled to state-action immunity. To get the immunity, one also has to show that the anticompetitive conduct was actively supervised by the state.

Of course, the Board is aware of all this, and so it obviously isn’t claiming that any state anticompetitive policy decision is immunized. This is why, if you look at the quotes above, it’s so important that the Board is an official agency of the state and part of the state government, and that the Board members are public officials and agents of the state. So the federalism value at stake, according to the cert petition, is not the state’s ability to regulate its economy generally, but rather its ability to structure its official agencies.

It’s not entirely clear to me why this should be. A sovereign state can choose to regulate its economy in all sorts of ways. One way is to have a policy enforced by state employees who work in the state Department of Justice or in local DAs’ offices. Another way is to have the policy enforced by state agencies. Another is to grant enforcement authority to private organizations. Another is to allow any individual to sue to enforce the policy. Thinking from first principles, none of these methods needs to be privileged. Hypothetically, if all the conditions for when enforcement of the policy is optimal can be spelled out in the statute and made a condition of valid enforcement, it doesn’t matter whether you enforce by state employees or through the citizens at large, or through any intermediate method like state boards or industry associations.

Of course, in reality different modes of enforcement aren’t usually optimal. For instance, we might care that a policy be enforced by politically accountable actors because the law is overbroad and optimal enforcement depends on the proper application of prosecutorial discretion; enforcement by private attorneys general or qui tam plaintiffs or bounty hunters might thus be excessive. But these are all policy choices that a sovereign state could make, and interfering with any of them disrupts the balance that a state wanted to strike. So it’s not obvious to me, from a federalism perspective, why official state agencies must be specially protected.

If there is a reason to protect official state agencies, one possible reason could be that (given Parker v. Brown’s initial decision to immunize acts of the state legislature itself) there’s reason to believe state agencies are really following legislative policy rather than just their members’ self-interest. On this view, clear articulation is still required, but once you have that, active supervision plays an essentially evidentiary role (as explained in Town of Hallie)—and therefore wouldn’t be required where we’re already reasonably confident that legislative policy is being followed. Perhaps the evidence isn’t required for municipalities because they’re political entities where private self-interest is (hopefully) somewhat muted. Perhaps the evidence isn’t required for agencies where the employees are on the state’s payroll and aren’t themselves participating in the market (i.e., where they have no obvious conflict of interest). Perhaps the evidence isn’t required where the officers go through a political appointment and removal process (i.e., where politics could screen against, and later punish, self-dealing). (This could be the basis of the political accountability argument added by the Fourth Circuit, though the FTC didn’t think it was strictly necessary.) But whatever the answer is, it’s not something that necessarily applies to all entities labeled “state agencies” by statute.

In short, given the generality of authorization satisfying the clear authorization requirement, the control needed to satisfy the active supervision requirement, and the Court’s methodology for determining which actor is responsible for a restraint, its doctrine boils down to a simple rule: restraints by state agencies are immune and restraints by private parties are not. If one also takes into account the criteria by which the Court determines whether or not an official state agency will be treated as a private party, this rule can be restated more precisely: state action immunity applies only when a financially disinterested state official controls the terms of the challenged restraint.

Under any rubric, the problem of determining the degree of control needed to immunize restraints initiated by financially interested parties is a difficult one. But this difficulty can only be eased if decisions are explicitly justified and guided by the underlying concerns about the decisionmaking process behind the restraint. Pure formal control should not suffice or else the state could through inaction and rubberstamping accomplish a de facto delegation that would be void de jure. Rather, a restraint would seem immune only if the financially disinterested actor whom antitrust law does trust to restrain competition not only knows about and has the power to control the restraint but also makes a substantive decision in favor of the restraint’s terms. It is only when the financially disinterested state representative has made such a substantive decision that there is any “realistic assurance” that the approved restraint is in the public interest.

So, should the labeling as an agency be dispositive? Probably not: various state-action immunity cases say states shouldn’t be able to immunize activity by just saying so, and by a similar logic, the special treatment afforded true state agencies shouldn’t be able to just come from a statute’s labeling an entity as an agency. As for the intermediate, “laundry-list” approach of the balancing circuits, a number of the balanced elements seem irrelevant to this inquiry—for instance, whether the organization is tax-exempt. And other elements seem to be relevant to the “active supervision” prong—for instance, the organization’s openness to public inspection and audit.

What about the Board’s quasi-legislative, quasi-executive, and quasi-judicial powers, as laid out in the first blockquote above (from the cert petition)? These powers do admittedly make an entity look a lot like the sort of agency that’s familiar to us from administrative law. But suppose the state gave these powers to a politically connected actor that we all agreed was private—so the private actor could not only act anticompetitively by himself, but also force other people to be part of his anticompetitive scheme. This private guy would now look like a lot more like an agency, but he wouldn’t be one where we’d be highly confident that he was really doing the government’s will, since there would be no check on his own self-interest.

Which brings us to the second element listed in the blockquote above: the government oversight and the entity’s subjection to state administrative-law requirements. Perhaps this is enough? Perhaps. But now we’re in the land of “active supervision”. We can disagree over how much supervision is necessary—Ticor stresses how “active” it must be—but it seems that some should be necessary when the arrangement looks like it can easily serve naked self-interest rather than the state’s policy (even an anticompetitive one). The term “agency” in administrative law and the term “agency” in the context of master-servant relations (e.g. the Restatement of Agency) aren’t the same, but it seems that the “active supervision” requirement here would have a similar flavor to the master-servant idea that the principal should be able to exert control over what the agent does and how he does it. Mere generic supervision, like open records and public meetings, isn’t substantive oversight; neither does the executive branch’s right to get annual reports. The legislative oversight and judicial review may be sufficient—I don’t know enough about how they work for this Board in North Carolina law—but it seems to me that this is a question appropriately addressed within the “active supervision” prong.

Sasha Volokh lives in Atlanta with his wife and three kids, and is an associate professor at Emory Law School. He has written numerous articles and commentaries on law and economics, privatization, antitrust, prisons, constitutional law, regulation, torts, and legal history.

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